How to profit from a falling pound

5th April 2013

As sterling suffered a massive slump this year, news reports focused on the impact for consumers and holidaymakers as the slide cut into spending budgets. However, for investors, the trend provides the opportunity for a welcome boost to their portfolio if they pick wisely writes financial journalist Harriet Meyer.

Despite a recent uplift in sterling after the Bank of England refrained from pumping fresh stimulus into Britain’s struggling economy, it remains one of the worst performing currencies this year, falling against both the dollar and euro.

With Britain’s economic outlook remaining uncertain, many experts expect sterling to continue the slump – particularly against the dollar – as it remains vulnerable to losses and could hit $1.5026, the March 20 low, again, or the mid-March trough of $1.4832, says Reuters.

However, while a weak pound drives up the cost of petrol, food, and makes holidays more expensive, it’s possible for investors to find a bright side, as it offers enticing opportunities in various investments, including international markets and global businesses.

Global businesses

The UK market is highly international, with around two thirds of the earnings of FTSE 100 companies coming from outside Britain.

Holding shares in the UK large cap sector, therefore, provides sterling-based investors with substantial protection against a falling pound, as income earned abroad will be worth more when converted into sterling. This includes household names such as Royal Dutch Shell, Diageo, HSBC, Unilever and BP.

The uplift in profits can be significant. Fawad Razaqzada, an analyst at GFT Markets, says: “Consider this – a $1m profit repatriated to the UK at the end of December last year would be worth £615,000, but three months later and that same $1m would be worth £667,000. Aggreko, ARM and BAT are also all good examples of UK companies with extensive sales operations overseas.”

As part of this trend, a fund sector that is set to benefit from falling sterling is global equity. Nathan Sweeney, investment manager at Architas, says: “The funds we currently hold in this asset class include the M&G Global Dividend fund and BNY Mellon Long Term Global Equity fund.”

He adds: “The UK Income sector also benefits from companies making substantial profits abroad including the likes of Vodafone and GSK. Funds we currently hold in the sector include JOHCM UK Equity Income fund and the Artemis Income Fund.” Companies such as BP and Glaxo pay dividends in dollars, so the value of these payments to British investors will rise as the pound weakens.

US-based funds

As the dollar gains strength, assets based in this currency will benefit from the dollar’s resistance in times of economic turbulence.

Sweeney says: “When sterling is falling, investors may also want to consider exposure to funds and companies domiciled outside of the UK, or whose earnings are predominantly in other markets which are improving, such as the US.”

For example, many investors hold funds that invest in US technology stocks, and the weak pound against the dollar will have boosted their value, and this uplift doesn’t rely on the underlying performance of the investment. Likewise, investments in European pharmaceutical companies will have benefitted from the weak pound against the euro. However, as the pound has fallen furthest against the dollar, it is dollar-based funds that have seen the greatest currency gain.

Long-term opportunities

However, when investing to take advantage of currency trends individual investors should look to benefit from long-term themes, and avoid focusing on short-term market movements, stresses Adrian Lowcock, senior investment adviser at Hargreaves Lansdown.

There is the long-term appreciation of Asian and Emerging Market currencies against sterling to consider, he says. “This has already started to happen and investors can benefit through investing in Asian and Emerging Market equities or debt.”

He favours Newton Asian Income, and also likes AXA Framlington UK Select Opportunities, with the latter’s manager Nigel Thomas seeking out companies benefiting from growth in the East.

Foreign Exchange Trading

The fluctuating fortunes of international economies has sparked renewed interest in currency trading as an investment, says Mark Bodega from currency exchange HiFX.

However, he warns: “Speculating on the FX markets should carry a strong and highly visible ‘government health warning’ so that all but the most seasoned market experts are discouraged from currency speculation.

“Personally, I believe anybody considering dipping their toes into the murky waters of the currency markets should be warned – this is a high risk game where any number of factors can swiftly turn a significant gain into a significant loss. “

Whether on a trading floor, through an online broker of a multicurrency account, this route to potential profit from currency movements is not for the faint-hearted.

Razaqzada adds: “Any good currency broker will provide you with a comprehensive education package and also explain various risk management strategies – but currency prices move rapidly, often without presenting any discernible trend.”